Western Asset Picks China Developer Debt as Slowdown Cuts Prices

Chinese developer bonds are among top picks for Western Asset Management Co. after investors exiting the debt on slowdown fears pushed the notes to bargain prices.

Western Asset, which had more than $436 billion under management as of June 30, favors short-dated bonds from BB rated real-estate companies, according to Chia-Liang Lian, the Singapore-based head of investment management for Asia outside Japan. Securities sold by Beijing-based Soho China Ltd., for example, fell as low as 94 cents on the dollar in June before rallying to 99 cents last week, Bloomberg prices show.

“These are good names, they have a relatively long track record as bond issuers and, if you look at real estate versus other industries, it’s more transparent,” said Lian, speaking during an interview in Hong Kong last week. “Fears of a Chinese hard landing, we think, are overplayed and we have full confidence that there will be sufficient ammunition.”

Banks from Citigroup Inc. to JPMorgan Chase & Co. and Barclays Plc expect the world’s second-largest economy to miss this year’s 7.5 percent growth target, a survey of analysts for Bloomberg News showed last week. Money streamed out of emerging market debt funds for a ninth consecutive week in the period to July 24, as investors pulled $1.1 billion from bonds, according to a Royal Bank of Scotland Group Plc report on July 26, citing EPFR data.

Slowing Growth

Chinese expansion slowed for a second quarter in the three months to June 30, extending the longest streak of sub-8 percent expansion in at least two decades.

Beijing last week pledged to prevent growth from slipping below a “reasonable” level as manufacturing gauges gave a mixed picture of output. An official index beat estimates while a preliminary gauge from HSBC Holdings Plc and Markit Economics fell to an 11-month low.

“The growth-at-all-costs model clearly is one that the current administration is trying to depart from,” said Lian. “Slower growth isn’t necessarily a bad thing. When you think about the Chinese economy, obviously it’s entering a phase of maturation,” he said, adding that growth of about 7 percent is in reach.

Notes from Chinese developers returned 1.24 percent in July, the third-best performing property bonds globally, Bank of America Merrill Lynch indexes show. The securities lost 4.87 percent in the quarter to June 30, the second worst in the sector.

Western Asset is also looking at opportunities in the utilities sector and in debt from quasi-sovereigns, Lian said.

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